Purchase
The purchase is the cost of buying inventory during a period for the purpose of sale in the ordinary course of the business. Purchases may include buying of raw materials in the case of manufacturing concern or finished goods in the case of retail business.
Accounting for Purchases
As purchase results in an increase in the expense and decrease in assets of the entity, the expense must be debited while assets must be credited. A purchase may be made on Cash or on Credit.
Cash Purchase
When a cash purchase is made, the following double entry is recorded:
Debit Purchases (Income Statement)
Credit Cash
The purchase is debited to account for the increase in expense.
Cash is credited to account for the decrease in cash of the entity.
Credit Purchase
In case of a credit purchase, the following double entry is recorded:
Debit Purchases (Income Statement)
Credit Payable
Sales
Sales refer to the revenues earned when a company sells its goods, products, merchandise, etc. (If a company sells one of its noncurrent assets that was used in its business, the amount received is not recorded in its Sales account.)
Accounting for Sales
As sale results in an increase in the income and assets of the entity, asset s must be debited whereas revenue must be credited. A sale also results in the reduction of inventory. A sale may be made in cash or on credit.
Cash Sale
When a cash sale is made, the following double entry is recorded:
Debit Cash
Credit Sales Revenue (Income Statement)
Cash is debited to account for the increase in cash of the entity.
Sale Revenue is credited to account for the increase in the income.
Credit Sale
In case of a credit sale, the following double entry is recorded:
Debit Receivable
Credit Sales Revenue (Income Statement)
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